June 5, 2019

Controlled demolition of MMT ― an exercise in elementary logic

Comment on Randall Wray on ‘JAPAN DOES MMT?’*

Blog-Reference and Blog-Reference (Link)

Randall Wray analyses the current situation in Japan: “From the MMT perspective, what Japan needs is a good fiscal stimulus, albeit one that is targeted. Japan has three ‘injections’ into the economy: the fiscal deficit (which has fallen from 7% of GDP to about 5% over the past few years ― still a substantial injection), the current account surplus, and private investment. But what it needs is stronger growth of domestic consumer demand ― which would also stimulate investment directed to home consumption.”

This recommendation is based on the “sectoral balance perspective”. This perspective is clearly defined by the sectoral balances equation which is given by (I−S)+(G−T)+(X−M)=0. The very characteristic of the MMT balances equation is that it does not contain the balance of the business sector, i.e. profit/loss. Accordingly, the word profit does not appear once in Randall Wray’s post. An economic model without profit, though, is like Hamlet without the prince or physics without the concept of energy.

The question is why does macroeconomic profit not appear in the sectoral balances equation? The short answer is because economists in general, and MMTers, in particular, are scientifically incompetent.

What MMT policy guidance lacks is the underlying true macroeconomic theory. Here it is.#1, #2

The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household and the business sector which, in turn, consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price as the dependent variable is given by P=W/R. The elementary production-consumption economy is shown on Wikimedia.#3

Elementary production-consumption economy

The focus is here on the nominal/monetary balances. For the time being, real balances are excluded, i.e. it holds X=O. The condition of budget balancing, i.e. C=Yw, is now skipped. The monetary saving/dissaving of the household sector is defined as S≡Yw−C. The monetary profit/loss of the business sector is defined as Q≡C−Yw. Ergo Q≡−S.

The balances add up to zero. The mirror image of household sector saving S is business sector loss −Q. The mirror image of household sector dissaving (-S) is business sector profit Q. Q≡−S is the elementary version of the macroeconomic Profit Law.

It is the definition of macroeconomic profit, i.e. Q≡C−Yw, where the logical blunder of MMT sneaks in. A definition ≡ is a one-way operator: a new variable (= definiendum) is introduced as a relationship of variables that are given by the axioms (= definiens).#4 While in an equation y=x−z it is possible to bring z to the left side, i.e. y+z=x, this is NOT admitted in a definition. The case is analogous to the prohibition of division through 0.

The operator ≡ defines a one-way relationship, the operator = defines a two-way relationship. The methodological failure of economists consists of not keeping these logical relationships properly apart.

Macroeconomic profit has above been defined as a relationship of axiomatic variables, i.e. Q≡C−Yw. Now, the representative economist comes along and performs the inadmissible operation Q+Yw≡C and introduces one more definition, i.e. Q+Yw≡national income≡NI. This reduces to NI≡C which is an improper definition because it applies TWO terms for the same thing, i.e. the terms “national income NI” and “consumption expenditures C” are interchangeable. This is like saying the words “apple” and “orange” apply to the same thing. So, the definition of “national income NI” is redundant, leads to economic gobbledygook, and therefore has to be cut off with Occam’s Razor.

The same holds for the investment economy. Profits for the two sub-sectors are given by Qc≡C−Ywc and Qi≡I−Ywi. Total profit Q is defined as the sum of sub-sectoral profits, i.e. Q≡Qc+Qi≡C+I−Yw. GDP is defined as GDP≡C+I, so Q≡GDP−Yw. The definition of GDP is admissible but the definition of national income NI≡Q+Yw is inadmissible. Therefore, NI≡GDP, or Keynes’ Income = value of output (GT p. 63), is economic gobbledygook. It leads to I=S and IS-LM and all the other falsehoods of After-Keynesian macroeconomics.

The axiomatically correct sectoral balances equation reads (I−S)+(G−T)+(X−M)−(Q−Yd)=0.#5, #6

Ramifications: The Wray Curve, the Kelton See-Saw#7, the Krugman Cross#8, and the rest of MMT is proto-scientific garbage.

Egmont Kakarot-Handtke

* New Economic Perspectives
#1 True macrofoundations: the reset of economics
#2 The canonical macroeconomic model
#3 Wikimedia AXEC31 Elementary production-consumption economy
#4 Wikipedia Definition
#5 Wikipedia and the promotion of economists’ idiotism (I)
#6 Wikipedia and the promotion of economists’ idiotism (II)
#7 Stephanie Kelton What Happens When the Government Tightens its Belt?
#8 Scott Fullwiler The Sector Financial Balances Model of Aggregate Demand

Related 'Accounting for dummies' and 'The Common Error of Common Sense: An Essential Rectification of the Accounting Approach' and 'How the Intelligent Non-Economist Can Refute Every Economist Hands Down' and 'Humpty Dumpty is back again' and 'The Humpty Dumpty methodology' and 'Is Nick Rowe stupid or corrupt or both?' and 'Profit, income, and the Humpty Dumpty Fallacy' and 'Mad but true: 200+ years after Adam Smith economists still have no idea what profit is' and 'Keynesians ― terminally stupid or worse?'. For details see also cross-references Accounting and cross-references MMT.

Jun 6